Identify the type of student loans you owe: Confronting student loan debt – Part 1

Take steps to create a plan of action to confront student loan debt.

Americans owe more than a trillion dollars in student loan debt. That is more than debt owed on credit cards and vehicle debt. The effect of this monstrous debt is often overwhelming for the borrower. Consequently, more than five million student loan borrowers have at least one loan past due according to Federal Reserve Bank of New York.

Often, borrowers have not taken the time to fully read the promissory notes/contracts for their loans. By doing this tedious but extremely important task, the borrower receives a clear understanding of what their obligations are on the loan. It will also clarify what type of student loan they have, whether it is a Federal student loan or private student loan. This is the first step toward creating a plan of action to confront student loan debt. This is important because each student loan product has different repayment requirements.

The most common student loan is the Federal Direct Stafford. There are two types: subsidized where no interested is charged to the borrower until the student leaves school and the unsubsidized which accrues interest while in school. For both types, repayment is not due until six months after the student leaves school.

Perkins loans are a type of subsidized student loans with a fixed interest rate that does not start accruing interest until repayment starts, which is typically nine months after graduation. These loans are guaranteed by the U.S. Department of Education; however they are administered by the particular college/university that issues it.

PLUS (Parent Loans for Undergraduate Students) are federal backed loans that can be made to parents and graduate students. The interest rate is fixed and has no grace period.

As a rule, Federal student loans offers low fix interest rates, income based repayment plans, provides cancellation of debt if the borrower works in certain employment, deferment options and usually doesn’t require a credit check (with exception to the PLUS loan).

If the borrower has Private Student Loans they generally come in two types: school-channel and direct-to-consumer.

School-channel loans have the lowest interest rates but generally take longer to process. They are "certified" by the school, which means the school signs off on the borrowing amount, and the funds are disbursed directly to the school.

Direct-to-consumer private loans are not certified by the school. In fact, schools don't interact with a direct-to-consumer private loan at all. The student simply supplies enrollment verification to the lender, and the loan proceeds are disbursed directly to the student. While direct-to-consumer loans generally carry higher interest rates than school-channel loans, they do allow families to get access to funds very quickly – in some cases, in a matter of days.

Both types have high limits that can be borrowed by the students but they also come with a higher interest rate. Typically no payment is due until after the student leaves school but the interest accrues immediately. Many student borrowers secure private student loans to supplement their federal student loans.

Once a student loan borrower understands what types of loan(s) he or she has, the next step is to locate who actually services the loans.

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